Financial Analysis of MYOB Group Ltd and Xero Limited

The report provides a brief overview of both the companies, outlining their core activities, competitive advantage and their historical performance. Further, various categories of performance ratios are calculated which evaluates and compares the financial position of both companies for the past two years. In the later part, the report explains the share price movements of both the entities and compares the same with the fluctuations in the market prices of ASX S&P 200. In addition, the report also explains the calculation of companies’ stock by using Constant Dividend Growth Rate model and compares the value with its recent market price of the stock. At last, a conclusion is provided stating the findings of the analysis and concluding that which company has performed better in the past two years.

RUNNING HEAD: BUSINESS FINANCE
Financial analysis

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Contents
Introduction.................................................................................................................................................3
Description of the companies......................................................................................................................3
MYOB Group Limited............................................................................................................................3
Xero Limited...........................................................................................................................................4
Calculation and analysis of performance ratios...........................................................................................5
Short term solvency.................................................................................................................................5
Long term solvency.................................................................................................................................6
Asset utilization.......................................................................................................................................8
Profitability ratios....................................................................................................................................9
Market value ratios................................................................................................................................11
Graphs and comparison of share price movements....................................................................................13
Share valuation..........................................................................................................................................14
Conclusion.................................................................................................................................................15
References.................................................................................................................................................16

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Introduction
The report discusses the financial performance of two Australian companies named as MYOB
Group Ltd and Xero Limited. It covers all the aspects from measuring the performance with the
help of key ratios to comparing the value of companies’ stock with its current share price. The
report provides a brief overview of both the companies, outlining their core activities,
competitive advantage and their historical performance. Further, various categories of
performance ratios are calculated which evaluates and compares the financial position of both
companies for the past two years. In the later part, the report explains the share price movements
of both the entities and compares the same with the fluctuations in the market prices of ASX
S&P 200. In addition, the report also explains the calculation of companies’ stock by using
Constant Dividend Growth Rate model and compares the value with its recent market price of
the stock. At last, a conclusion is provided stating the findings of the analysis and concluding
that which company has performed better in the past two years.
Description of the companies
MYOB Group Limited
Mind Your Own Business (MYOB) is an Australia based multinational company engaged in
providing various types of accounting software services to small and medium sized entities. The
company was found in 1980 by a team of developers working at Teleware Inc. and got listed on
ASX on 9 July 1999. The company develops and publishes software in New Zealand and
Australia. It operates its business through three segments named as Payment Solutions, Clients
and Partners and Enterprise Solutions. The segment payment solutions offer various types of

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services like payment gateway services, merchant services facilities, fraud management and
invoice payments. Clients and Partners segment payroll, tax and other management solutions to
SMEs and provide advisory services to the business. The division of Enterprise Solutions
provides services related to business management software like enterprise resource planning,
payroll and human capital management. Currently, the company is the leading provider of
business management solutions across the country (Bloomberg. 2018).
Xero Limited
It is software as a service (SaaS) company operating its business in Australia, United States and
other countries. The entity deals with offering a platform for conducting online accounting
services for the businesses and their advisors. There are two segments of the company through
which it operates and they are Australia and New Zealand (ANZ), and International. Its cloud
accounting software named as Xero for small businesses is provided in ANZ and United
Kingdom. The software contains over 400 add-on applications that allow individuals to
customize Xero as per their needs. It has various features including payments, reports, invoicing,
cash flow, support and mobile. With help of such features, it offers online accounting training for
small and medium size businesses as well as provides access to the real-time account
information. Xero was founded in 2006 and it is one of the fastest growing software on
international basis. It employs more than 2000 people and is considered as the World’s Most
Innovative Growth Company in 2014 and 2015 according to Forbes. It is publically listed on
ASX and is traded with the symbol XRO.AX (Reuters. 2018).
Being operating in the same market, both the companies give each other tough competition as
they perform their functions in same industry. The competitive advantage of MYOB was gained
by its acquisition of BankLink, a New Zealand accounting solution provider. This deal was the

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strategic move of the company in order to expand its cloud computing space and business
management solutions (MYOB. 2013).
Calculation and analysis of performance ratios
Short term solvency
 Current ratio
It helps in evaluating the capability of the company by comparing its current assets and
liabilities. The ideal CR is 2:1 which indicates that the entity must have its CA double of its CL
so that it can easily meet its financial obligations (Saleem and Rehman, 2011).
MYOB GROUP LTD XERO LTD
Current ratio 2016 2017 2016 2017
Current assets (A) 96.0 100.0 191.0 135.0
Current liabilities
(B) 91.0 101.0 42.0 60.0
CR (A/B) 1.05 0.99 4.55 2.25
(Morningstar. 2018).
From the above table, it can be interpreted that Xero Ltd has high current ratio as compare to
MYOB Group Ltd. However, the ratio has been declined in 2017 for both the companies yet
Xero had more assets and fewer liabilities comparatively. The reason for decline was the overall
reduction in companies’ CAs and upsurge in their CLs respectively.
 Quick ratio

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It is another liquidity ratio which determines the ability of the entity to meet its current
obligations by utilizing its most liquid assets. Quick assets comprise of all current assets except
inventory and prepaid expenses. The ideal ratio is 1:1 (Higgins, 2012).
MYOB GROUP LTD XERO LTD
Quick ratio 2016 2017 2016 2017
Quick Assets (A) 96.0 100.0 185.0 130.0
Current Liabilities (B) 91.0 101.0 42.0 60.0
QR (A/B) 1.05 0.99 4.40 2.17
It can be interpreted that MYOB had no inventory in past two years which makes its QR equal to
its CR. On the other hand, the same trend has been noticed in the quick ratio of Xero Ltd. in
2016, it was 4.40 which reduced to 2.17 in 2017. This was due to the significant decline in
company’s cash balance and zero short term investments last year.
Long term solvency
 Debt-to equity ratio
It requires the measurement of company’s debt and equity proportion against each other in order
to figure out the portion of assets that are financed through debt and the assets funded by equity.
Generally, entities having high D/E ratio are more risky as compare to the one having lower
ratios (Tracy, 2012).
MYOB GROUP LTD XERO LTD
Debt to equity 2016 2017 2016 2017
Total debt (A) 434.0 432.0 1.0 3.0

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Shareholder's equity (B) 857.0 844.0 251.0 205.0
D/E (A/B) 50.64% 51.18%
0.40
% 1.46%
(Morningstar. 2018).
The above calculations reflect that the D/E ratio of MYOB has increased in 2017 as compare to
the previous year. In 2016, it was 50.64% which rose to 51.18% in 2017. This was because of the
fact that the decrease in debt was lower than the decline in company’s equity. This anyway
boosted up the ratio in 2017. On the other side, Xero ltd’s ratio has also increased but it was way
lower than MYOB. It rose from 0.40% to 1.46% due to the significant upsurge in its total debt.
However, the company has low debt as compare to its equity. This shows that it relies more on
its owners’ equity for raising funds.
 Debt ratio
It compares the total assets of the firm with its total liabilities and reflects the part of company’s
assets that are financed through debt (Vogel, 2014).
MYOB GROUP LTD XERO LTD
Debt ratio 2016 2017 2016 2017
Total Liabilities
(A) 532.0 555.0 44.0 63.0
Total Assets (B) 1,389.0 1,400.0 296.0 268.0
DR (A/B) 38.3% 39.6% 14.86% 23.51%
The same trend can be seen in debt ratio of both the companies. MYOB’s ratio rose from 38.3%
to 39.6% due to the considerable increase in its assets and liabilities. Although, its interest

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bearing borrowings reduced in 2017 but its total non-current liabilities has shown an upsurge
which ultimately affected the ratio. In case of Xero Ltd., there was an upward trend in the ratio
and it increased from 14.86% to 23.51%. This was due to a significant upsurge in company’s
long term borrowings from $1 million to $3 million in 2017. It boosted up the ratio to a great
extent.
Asset utilization
 Receivable turnover ratio
It shows how quickly a firm converts its trade receivables into cash. In other words, it determines
the efficient and effective collection of company’s trade debtors so as to increase the overall
revenue (Jenter and Lewellen, 2015).
MYOB GROUP LTD XERO LTD
Receivable turnover
ratio 2016 2017 2016 2017
Total revenue (A) 369.0 414.0 187.0 270.0
Average receivables (B) 14.0 17.5 7.0 9.5
DTR (A/B) 26.36 23.66 26.71 28.42
(Morningstar. 2018).
MYOB Group Ltd has low DTR which indicates that the company is inefficient in collecting its
receivables. The reduction in ratio was contributed by the increase in MYOB’s receivables from
$14 million to $17.5 million. On the other hand, Xero has shown a reverse trend in its ratio as it

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rose from 26.71 times to 28.42 times. This indicates that company is good at collecting its
debtors and the same has been reflected by its cash balance.
 Asset turnover ratio
It measures the amount of company’s sales or revenue that is generated by utilizing its assets
effectively and efficiently. It is calculated by dividing the total sales with average total assets of
the firm (Kimmel, Weygandt and Kieso, 2010).
MYOB GROUP LTD XERO LTD
Asset turnover ratio 2016 2017 2016 2017
Total revenue (A) 369.0 414.0 187.0 270.0
Average Total Assets (B) 1,384.0 1,394.5 333.5 282.0
ATR (A/B) 0.27 0.30 0.56 0.96
The ATR of MYOB has increased during the past two years but the same was less than the ATR
of Xero Ltd. The upsurge in the ratio of MYOB was due to the noteworthy increase in its total
assets and total revenue. Xero Ltd. has also shown the increase in its ATR from 0.56 times to
0.96 times during last year. Such upsurge can be defined by the reduction in company’s assets
from $333.5 million to $282.2 million. Whilst its revenue also increased which ultimately
boosted up the ratio.
Profitability ratios
 Net profit margin

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It measure the net profit of the company earned from the total revenue during the year. The
amount of the profit is expressed as a percentage of total sales and it indicates the overall
profitability of the firm (Krantz and Johnson, 2014).
MYOB GROUP LTD XERO LTD
Net profit
margin 2016 2017 2016 2017
Net profit (A) 54.0 61.0 -74.0 -63.0
Total revenue (B) 369.0 414.0 187.0 270.0
NPR (A/B) 14.63% 14.73% -39.57% -23.33%
From the above table, it can be interpreted that the NPR of MYOB has increased from 14.63% to
14.73% last year. This was because of the slightest hike in company’s profit from $54 million to
$61 million. One of the reasons for such hike was the profitable business delivered by the
acquisition of PayGlobal. On other hand, Xero has made losses in the past two years which
makes its NPR negative. Reason being, the operating expenses of the company grew which
causes the operating deficit in the year.
 Return on Assets
It reflects the amount of return generated by the total assets of the company. A high ROA
indicates high profitability (Lee, Lee and Lee, 2009).
MYOB GROUP LTD XERO LTD
Return on Assets 2016 2017 2016 2017
Net profit (A) 54.0 61.0 -74.0 -63.0
Total Assets (B) 1,389.0 1,400.0 296.0 268.0

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ROA (A/B) 3.89% 4.36% -25.00% -23.51%
This also showed the similar trend and rose from 3.89% to 4.36% in case of MYOB Group Ltd.
Increase in assets and net profit gave a hike to the ratio whereas Xero Limited has negative ROA
of -23.51% in 2017 because of the loss made during the period.
 Return on Equity
The ratio measures the return offered by the company to its shareholders on the portion of their
capital invested in the business. Generally, companies delivering high profits give high returns to
its investors (Nikolai, Bazley and Jones, 2009).
MYOB GROUP LTD XERO LTD
Return on Equity 2016 2017 2016 2017
Net income available to shareholders (A) 54.0 61.0 -74.0 -63.0
Shareholder's equity (B) 857.0 844.0 251.0 205.0
ROE (A/B) 6.30% 7.23% -29.48% -30.73%
Similar trend was observed in the ROE of MYOB as it rose from 6.30% to 7.23% in 2017. With
high profits, the company is able to provide high returns to its shareholders and improve its
profitability position. However, the same is not the case for Xero Ltd. as the firm has incurred
losses in last two years which make its ROE negative and reflects that its profitability has been
reduced.
Market value ratios
 Earnings per share

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This ratio shows the amount of company’s profit allocated to each outstanding share of the
common stock. It is also an indicator of company’s profitability position (Penman, Reggiani,
Richardson and Tuna, 2017).
MYOB GROUP LTD XERO LTD
Earnings per share 2016 2017 2016 2017
Net income available to shareholders
(A) 54.0 61.0 -74.0 -63.0
Number of outstanding shares (A) 605.0 600.0 136.0 137.0
EPS (A/B) 0.089 0.10
-
0.54
-
0.46
As the profits of MYOB have improved during the year, its EPS has also shown an upsurge from
0.089 cents to 0.10 cents. As compare to this, Xero Limited had negative EPS because of its low
earnings.
 Price-Earnings ratio
It is also known as price multiple and it measures the market price of the share against the
earnings of the stock. In other words, it shows the amount an investor is willing to pay per dollar
of earnings (Godwin and Alderman, 2012).
MYOB GROUP LTD XERO LTD
Price earnings ratio 2016 2017 2016 2017
Market value per share
(A) 3.229 3.301 17.4 24.2
Earnings per share (B) 0.089 0.1 -0.54 -0.46

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P/E (A/B) 36.1768 32.4689 - 31.98 - 52.60
The P/E ratio of MYOB reduced from $36.17 to $32.46 during the year 2017. Such reduction in
the ratio indicates that the stock of the firm is doing well as compare to the past trends. The
investors will get benefits in future when the stock price increases. The similar trend is noticed in
case of Xero Ltd. due to negative EPS, the P/E of the company also become negative and was at
-$52.60 in 2017.
Graphs and comparison of share price movements
MYOB Group Limited
The below graph shows the movements in average return of MYOB Group for the last two years
and the same is compared to the fluctuations in the market return. The trend lines in the graph
depicts that changes in company’s returns are highly impacted by the variations in market. It can
be observed that initially both the market and stock shown an upward trend and by the end of
2016, both declines to an extent. However, in the mid of 2017 the market return was negative
whereas the stock return turns out to be positive during the same period. After that the
fluctuations in both market and company’s return are almost same but high variations were there
in MYOB’s stock return as compare to market.

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1/07/2016
1/09/2016
1/11/2016
1/01/2017
1/03/2017
1/05/2017
1/07/2017
1/09/2017
1/11/2017
1/01/2018
1/03/2018
1/05/2018
1/07/2018
-0.1500
-0.1000
-0.0500
-
0.0500
0.1000
0.1500
Share price movements
MYO S&P 200
(Source: Yahoo Finance. 2018).
Xero Limited
1/07/2016
1/09/2016
1/11/2016
1/01/2017
1/03/2017
1/05/2017
1/07/2017
1/09/2017
1/11/2017
1/01/2018
1/03/2018
1/05/2018
1/07/2018
-0.1500
-0.1000
-0.0500
-
0.0500
0.1000
0.1500
0.2000
0.2500
Share price movements
XRO S&P 200
(Source: Yahoo Finance. 2018).

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From the above graph, it can be depicted that returns of Xero Ltd. are highly independent from
the changes in market return. Both the trend lines are away from each other. It is observed that
initially both increases but at the start of 2017, the company had high and positive return whereas
the market was declining. After that the market return became steady for some period while
Xero’s stocks were providing high returns. Overall, it can be said that the changes in company’s
stock are independent of market variations.
Share valuation
The valuation of share is done by applying constant dividend growth rate model. The value of
MYOB’s stock is $11.50 which is more than its current market price of $2.95. This means that
the stock is undervalued. This means that the investors can purchase the stock when price
reduces and sell the same at time of hike in price. The main reason for such scenario is that the
market has lost confidence in the entity and believes that its assets are not sufficient enough to
generate future profits. As far as Xero Limited is concerned, the company does not have any
stock value because it did not declared any sort of dividends last year (Refer excel).
Conclusion
From the above analysis, it can be concluded that the performance and position of Xero Limited
has improved in 2017 apart from the profitability factor. However, it is observed that MYOB
Group has positive and high profits but its efficiency, liquidity and capital structure has declined
during the year. Moreover, its share price has also been affected by the changes in market
whereas Xero’s stock returns are highly independent of the same. In addition, it is also concluded
that MYOB’s shares are undervalued and do provide a buying opportunity to the potential

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investors. So overall, looking at the profitability aspect and return on equity, it will be
recommended to invest in the share of MYOB Group Limited.
References
Bloomberg (2018). Company Overview of MYOB Group Limited. [Online]. Available at:
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=225593580
Godwin, N., and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D. andLewellen, K. (2015). CEO preferences and acquisitions. The Journal of
Finance, 70(6), pp.2813-2852.
Kimmel, P. D., Weygandt, J. J., andKieso, D. E. (2010). Financial accounting: tools for business
decision making. New Jersy: John Wiley and Sons.

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Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John
Wiley and Sons.
Lee, A. C., Lee, J. C., and Lee, C. F. (2009). Financial analysis, planning and forecasting:
Theory and application. Singapore: World Scientific Publishing Co Inc.
Morningstar (2018). MYOB Group Ltd. [Online]. Available at:
http://financials.morningstar.com/income-statement/is.html?t=XASX:MYO&region=AUS
Morningstar (2018). Xero Ltd. [Online]. Available at: http://financials.morningstar.com/income-
statement/is.html?t=XRO&region=aus&culture=en-US
MYOB (2013). MYOB gains competitive advantage with completion of BankLink purchase.
[Online]. Available at: https://www.myob.com/au/about/news/2013/myob-gains-competitive-
advantage-with-completion-of-banklink-purchase
Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage
Learning.
Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A. (2017). A Framework for Identifying
Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price.
Reuters (2018). Xero Ltd (XRO.AX). [Online]. Available at:
https://www.reuters.com/finance/stocks/company-profile/XRO.AX
Saleem, Q. andRehman, R.U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary
Journal of Research in Business, 1(7), pp.95-98.
Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse
any business on the planet. RatioAnalysis. Net.

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Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New
York: Cambridge University Press.
Yahoo Finance (2018). MYOB Group Limited (MYO.AX). [Online]. Available at:
https://finance.yahoo.com/quote/MYO.AX/history?
period1=1467311400&period2=1530297000&interval=1mo&filter=history&frequency=1mo
Yahoo Finance (2018). Xero Limited (XRO.AX). [Online]. Available at:
https://finance.yahoo.com/quote/XRO.AX/history?
period1=1467311400&period2=1498761000&interval=1mo&filter=history&frequency=1mo